<< << Yet, if the Market goes up 60% from here, then falls back a "calamitous" 40%, that would only leave the Market 4% down from where it is now. >> >>
<< What if there is an economic relationship between the cost of capital (interest rates) and Return on Equity? >>
Obviously, the 2 must be related.
<< What if there is some sort of competitive pressure/wage/overcapacity issues that drives ROE down to lets say 5.5% above the so called risk free rate (long treasuries). That has been the ball park average and the number used in a couple of pricing models that are popular. (over time of course) >>
For reasons I will soon present on this thread (at some length), I think ROE is much lower, and therefore much less out of line with interest rates, than published figures would indicate.
<< What if a majority on Wall St. or the FASB finally admits that
earnings are overstated due to stock option compensation? (Actually
FASB has already admitted it but they were overruled by political
pressures from those who are issuing them to themselves.) >>
This was most unfortunate. But, as you have pointed out, Wall Street is not oblivious to the problem. A number of the most eminent names in investing like Buffett, Tisch, and Clough, have publicized this issue. Clough's figure is a 10% earnings trim on large cap stocks.
<< All of a sudden corporate ROE (would be 11%-12%). (the reality
numbers...not Wall St illusions and slight of hand) >>
But, as we have discussed privately, accounting rules not only inflate earnings, they also deflate book value. I think ROE numbers are greatly inflated, not because the stated earnings are much too high, but because the stated book values are much too low. As you know, there are great tax advantages to writing down assets -- and, btw, these tax advantages are to the ultimate benefit of shareholders.
<< These are the types of numbers that existed in the past under similar conditions to today. >>
That's another reason why I believe real ROE is much less than reported, and therefore not as out of line with the past as the published numbers are.
<< Book value for the S&P500 is around 200 (97 numbers not yet
released)
.12 * 200 = EPS 24
To grow at 6% would require the addition of $12 of book value
capital.
That would mean dividend slashes and a PE of over 45. The present
value of future cash flows would suggest that the values of the
businesses are back to about a PE 14 or so!!!!
14 * 24 = S&P500 = 336. Ouch...I mean Double Ouch >>
I didn't quite follow this in detail, but, as I understand it, the gist is that if the book values are correct, and the Market's earnings to book ratio returns to historical norms, and the p/e ratio does as well, then stock prices collapse. That's true.
To give a taste of the piece I'm in the process of writing, this week's Barron's publishes the price to book ratio on the S&P Industrials as 7.77. You and I both know that this is not only impossible, it is absurdly impossible. This is just one reason why I believe that the FASB's obtuseness about accounting for intangibles acquired through corporate takeovers, and corporate maneuvers to avoid taxes, are systematically understating book value, and therefore reporting ROE at a similarly impossible 27%+.
<< No one can argue with any view about "stocks may or may not go up
and by how much" or "how much they will come down". >>
No one can argue with the view that economic collapse is inevitable, but may be as much as 15 years off. At least no one can argue with it until 15 years from now. But, i don't know how to make money off of this knowledge, sitting in cash or commodities for perhaps as much as 15 years waiting to see if it comes true.
<< Enough
liquidity from the central bank and all is possible for a while. We are
discussing value investing though. By definition we are discussing
present values of future cash. Of course the above is a worse case
scenario but the present value of current "real" cash suggest that
investors are accepting lower real and nominal rates than ever. If
there are any of the above economic balancing effects (and I strongly
believe there are)
then stocks are wildly overvalued. AGAIN...they can continue to rise
but that would have nothing to do with value which is what we are
discussing. The printing press can accomplish wonders for years until
it leaves a country in ruin...Japan Again!
On the contrary, Japan's ruin came from artificially suppressing consumption as well as competitive investment returns, leaving the Japanese people with little choice but to "save" much of their income at 2.5% interest, or less. This stealth tax on income was then used to finance increased capacity and profitless market share expansion, without regard to ROE -- the opposite of what the U.S. has been doing. It's like the old joke -- A: "Business is great -- I'm buying pencils for a dollar a dozen and selling them for 5 cents each." B: "How do you make a profit?" A: "Volume!"
<< Value is what is real not what Wall St. fails to recognize or accept. >>
Very true. |
